RALEIGH — During the General Assembly's budget-shortfall debate, the revenue option most discussed was the sales tax. That earlier one-penny increase in the tax, which has now expired, became a symbol of the collective contributions we all could make to adequately support our schools, parks, courts and the well-being of our communities.
Retaining the higher sales tax could have protected many investments critical to the success of North Carolinians and the broader economy, but it would have done very little to address the realities the state must face about its revenue system. We need a more modern system - one that reflects the way the economy has changed - and soon.
The challenge: North Carolina fails to collect adequate revenues to support our collective commitments to educating our children, protecting our neighborhoods and supporting our elders. And the revenue the state does collect asks more from those with the least ability to pay.
With fewer dollars available for public schools this year, as back-to-school time nears the state holds its annual August sales tax holiday. Although many North Carolinians are facing increased pressures on their budgets, including growing responsibilities for the cost of school supplies due to cutbacks in state investments, the sales tax holiday is a poorly targeted way to fix problems with the sales tax.
The sales tax is the major driver of our upside-down tax system. Middle-income North Carolinians earning about $37,000 a year pay on average four times more as a share of their income in sales and excise taxes than those earning more than $1 million.
Sales tax holidays do little to address such inequities. The holiday exempts all taxpayers, even the wealthiest. And because these households have more flexibility in their budgeting, they can more easily time their purchases to take advantage of this limited-time offering.
The sales tax generates nearly a third of the state's revenue. And yet our sales tax holiday results in the loss of $12 million each year, money that could support early childhood education or improve the educational attainment level of the state's young work force - both of which were cut this year because of the failure to take a balanced approach to closing the budget shortfall. The sales tax holiday simply further undermines the adequacy of the revenue system to support shared investments.
The administration of sales tax exemptions, including holidays, also creates significant red tape. It requires retailers and revenue departments as well as local governments to monitor and document the distinction of eligible and ineligible products, for example. We need better, long-term solutions that lead to real improvements in the state's revenue system.
An important first step is continuing North Carolina's reliance on the primary personal income tax, which serves as the best tool to achieve a revenue system based on ability to pay. Preserving the income tax prevents us from shifting too far to a consumption-based tax system that asks low-income families to contribute more for the public structures we all enjoy.
Making the sales tax fairer to businesses, regardless of their industry, requires making sure our tax system better reflects the economy of today. Our current goods-based sales tax ignores the shift to an economy based primarily on services. Extending the sales tax to include purchases of services as well as goods would include more business activity and ensure revenues keep pace with our growing economy.
Finally, the best tool to achieve greater equity in the tax system is a strong state Earned Income Tax Credit. The EITC reaches 800,000 primary wage earners across the state who are paying a greater share of their incomes in taxes, primarily through the sales tax, than higher-income households. Strengthening and increasing the value of the state's EITC should be a top priority of policymakers.
It is certainly important that North Carolinians continue to spend in our local economies in order to support economic recovery. But a modernized sales tax with a strengthened Earned Income Tax Credit would go further than the sales tax holiday in building a tax system that is based on ability to pay and that can support a strong economy in the long term.
Alexandra Forter Sirota is director of the N.C. Budget and Tax Center, a public-interest organization.